In 1995, Bill and Sandy met with me to discuss what to do with a real estate investment that had appreciated significantly. The investment represented a meaningful portion of their net worth, and they felt the time was right to sell. However, they didn’t necessarily need a large infusion of cash and they didn’t want to pay the tax (in 1995, the capital gain rate was 29%).
What Bill and Sandy really needed at that time was income. They had two active teenagers and were paying for private school, travel soccer, spring break trips, and summer excursions abroad. They also had a large home to keep up with and needed to keep everyone entertained.
A CRT Was a Good Choice at the Time
It seemed that at this time a charitable remainder trust (CRT) would be their best option. While there are many versions of the CRT, simply stated, the taxpayer establishes a trust in which the taxpayer is the income beneficiary and at death, the remainder of the assets in the trust pass to one or more named charities. The CRT is established before the asset is sold, the asset is contributed to the trust, and on sale, no federal or state tax is due on the gain. They receive an immediate charitable income tax deduction for the present value of the trust assets that will be distributed to charity upon their deaths, which can be used to offset some or all of the income tax liability. Thus the CRT would enable Bill and Sandy to put their real estate in the CRT, then sell it, and defer the related capital gain, garner an immediate charitable deduction, and collect income from the trust moving forward.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The CRT worked masterfully for years. They enjoyed the income stream while their children were still in the house and active. Afterward, they used it to help pay college tuition and were able to continue to use it during a period of world travel during early retirement.
Then Things Changed
But then Bill and Sandy decided to slow down a bit. They sold their house and moved into a condo near their golf and tennis club.
Today, they continue to enjoy their condo and frequently visit their children and grandchildren for months at a time. Their income need is minimal, and Bill recently had their CPA go on a “quest,” as Bill likes to say, to reduce their taxable income. “We have more than we need. At this point, it’s all about the kids and grandkids,” noted Bill.
The CPA, working with Bill and Sandy’s investment advisers, was able to largely eliminate all of their taxable income streams, except one: their CRT.
“That CRT worked so well for so many years,” said Bill. “But as I look at it now, it’s unlike everything else we owned. Our house worked great, but when the kids moved out, we sold it. Our investment advisers have retooled our portfolio as we’ve gotten older and we updated our trust and estate planning as the grandkids were born. We even traded in the Suburban for a sedan. But this CRT, which was such a great fit for so many years, can’t change like those other things.”
Options to Consider
At a recent meeting I explained to them that even that CRT can be dealt with.
What Bill and Sandy didn’t know is that their CRT income interest was a capital asset. And just like the stocks, bonds and real estate they retooled over time; we were able to explore options for this capital asset as well.
The options include:
- Sell it for cash
- Roll it into a new CRT for their children and/or grandchildren
- Give it to charity
For Bill and Sandy, the choice was easy. They sold their income interest and decided to use the proceeds. They invested in one of their children’s growing businesses, another chunk went into 529 college savings plans for their grandchildren’s education, and the rest they gave to their investment advisers to manage and eventually pass to their children after the last of their deaths.
How About Rolling It Over Instead?
But Bill and Sandy also had another option, which many clients are choosing. They could have rolled their income interest into a new CRT for the benefit of their children and/or grandchildren. While this didn’t make sense for Bill and Sandy, who had immediate ways to deploy the sale proceeds, for those who simply wish to convert their future CRT income into income for their loved ones, this idea of creating a new CRT could be a great option.
The bottom line? There are a variety of strategies for managing a CRT of which you may not be aware. It is always prudent to review your estate plan and the best available risk-mitigation strategies with your investment advisers.
-
Six Missteps to Avoid as You Transition to RetirementDon't lose sight of your finances when you finally reach retirement. These six classic missteps can chip away at the nest egg you’ve worked so hard to build.
-
Why Does One Claim Jack Up My Insurance After Years of No Claims?Even loyal customers can be hit with an insurance premium hike after a claim, despite going many years without any claims. There's a reason for that.
-
To Future-Proof Retirement Security, We Need Better StrategiesWith retirees living longer and the inequalities that affect women and people of color, the retirement system needs some optimization. Here’s what would help.
-
Here's Why We All Win When Charitable Dollars Go to WomenGiving to charities for women and girls not only has a lasting impact on their lives — it also benefits society as a whole. Here’s how to start investing.
-
For a More Secure Retirement, Build in Some 'Safe Money'To solidify your retirement plan, write it down, reduce your market risk and allocate more safe money into your plan for income.
-
Five Steps to a Mindfully Fearless CareerIf, like many women, you're struggling with imposter syndrome, try developing an athlete's winning mindset. It's as simple as facing one small fear every day.
-
Six Ways to Optimize Your Charitable Giving Before Year-EndAs 2024 winds down, right now is the time to look at how you plan to handle your charitable giving. The sooner you start, the more tax-efficient you can be.
-
How Preferred Stocks Can Boost Your Retirement PortfolioHigher yields, priority on dividend payments and the potential for capital appreciation are just three reasons to consider investing in preferred stocks.
